Zero-debt allows substantial financial flexibility, especially for small-cap companies like Tanami Gold NL (ASX:TAM), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While TAM has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for Tanami Gold
Is TAM growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. TAM’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. TAM delivered a strikingly high triple-digit revenue growth over the past year, therefore the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can TAM meet its short-term obligations with the cash in hand?
Since Tanami Gold doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at A$0.3M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 29.51x. However, a ratio greater than 3x may be considered as too high, as TAM could be holding too much capital in a low-return investment environment.
Next Steps:
Having no debt on the books means TAM has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may be different. I admit this is a fairly basic analysis for TAM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Tanami Gold to get a better picture of the stock by looking at: